Monday, February 28, 2005

How to use "impairment test" on Goodwill?

Reuters gave a good story on how U.S. company overpaid for past acquisititions, listing a bundle of examples such as Viacom. Inc., a big entertainment and media company in U.S. , who have lost $18 billion in the "goodwill impairment" reported in the quarter. Another example is Hewlett Packard's acquistion of Compaq in $15 billion of goodwill. The new accounting standards in U.S. stockmarket require corporations to do an annual "impairment test" to see if they could justify the value of their intangible assets, based on existing and future business fundamentals. A goodwill writedown is merely a matter of coming clean with shareholders, said Mark Sirower of PricewaterhouseCoopers, where he heads a team of mergers acquisition consultants.

Though the new accounting standards is just a lagging indicator to test the success of the acquistion, it made the goodwill more transparent to investors and shareholders.

In China, the M&A are more hot this year. The dealing amount of China's M&A are expected to grow up 40 to 50 per cent in value this year, according to a PricewaterhouseCoopers survey reported in February 4th(reported by unlinkable SCMP) . It said that mainland M&As were worth US $52 billion last year, rising up 50 per cent from 2003. China was the largest M&A market in Asia in number terms and accounted for 32 per cent of all deals in the region, followed by Australia and Japan. Will the regulators require "goodwill impairment" to those companies in the operations? I wonder.

Definition of Goodwill: The amount above the fair net book value (adjusted for assumed debt) paid for an acquisition. Goodwill appears as an asset on the balance sheet of the acquiring firm and must be reduced in the event the value is impaired.

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